Battle for the soul of microfinance: Part 1, the victims

Borrowers’ ability to repay loans is the cornerstone of lending, both as a business model and in its morality – when large numbers of borrowers fail to repay, both are called into question:

In this photo taken Feb. 14, 2012, Shwetha, 5, sits on the lap of her mother Sunita, 22, as she holds a photograph of her debt-ridden father Hari Prasad, who consumed fertilizer chemical to kill himself on Aug. 1, 2010, in Kadiri village about 160 kilometers (99 miles) north of Bangalore, India. A wave of suicides among the impoverished residents of India’s Andhra Pradesh state was blamed on the relentless tactics of agents from microfinance companies, which give small loans intended to lift up the very poor.

Pro-poor lending flourishes in the gap between high perceived risk and lower real risk, and in that space venture only the pioneers.

There may be gold in that wilderness

As the Associated Press revealed in an explosive story, that pioneering spirit was the genesis of microfinance:

Originally developed as a nonprofit effort to lift society’s most downtrodden, microfinance has increasingly become a for-profit enterprise that serves investors as well as the poor.

Under the Law of Economic Gravity, all businesses must make a profit of they are unsustainable.For-profit or non-profit are thus not distinctions of business model but rather of orientation: do you make impact so as to make profit, or do you pursue profit so as to be able to scale your impact. Either way, you have to be a Mission Entrepreneurial Entity, and that required balancing the worse and better angels of our nature.

As India’s market leader, SKS has pioneered a business model that many others hoped to emulate.

“Microfinance needs to be a supervised product but as it becomes larger, it can lose being a supervised product.”

In this context, ‘supervision’ means customer assistance both pre- and post-financing.

The story of what went wrong at SKS has led current and former employees and even some major shareholders to question that strategy and raises fundamental questions for the multibillion-dollar global microfinance industry.

Indeed, what is important is not so much the anecdotes, hideous and tragic though they unquestionably are, but what they say about an absolute core issue:

Can a for-profit business model protect its organization against profit-maximizing imperatives of its agents that result when expansion is rapid?

If No – if scaling a for-profit inescapably destroys value system integrity – then microfinance, ‘frontier’ lending, and by extension the whole pro-poor financing arena, has to be limited to non-profits, and the business may never scale.The argument against for-profits lies in what I believe James Blish would have calledthe morality of the machine itself.

“In questions involving value judgments, it’s helpful to have an opponent who is not only remorselessly logical, but also can’t distinguish between a value and a Chinese onion.”

On this point, of course, he was wrong, as he found out rather quickly.He had forgotten that machine logic is a set of values in itself, whether the machine knows it or not.571

One of the greatest science fiction series ever

The AP story includes what I think is a red herring, so I’ll place it in context before using it:

An independent investigation commissioned by the company linked SKS employees to at least seven of the deaths.

That is complicated libelous given this statement:

SKS continues to deny all responsibility for the deaths and says it never commissioned an independent inquiry.

Apparently the company is not denying that such a report existed, but rather that it was not commissioned by the company – a nice non-denial denial.A stronger denial is this:

SKS spokesman J.S. Sai, who flew to Mumbai from the company’s Hyderabad headquarters to discuss the AP findings, said the company stands by its September 2011 affidavit before India’s Supreme Court. In that affidavit, chief executive M.R. Rao says SKS “is neither the cause of nor responsible for any suicides in the state of Andhra Pradesh.”

Trying to quell the Rao: SKS’s CEO (left) and CFO (right)

So is this one:

P.H. Ravikumar, who became interim chairman of the SKS board last November, said neither management nor the board authorized an independent inquiry into borrower deaths.

Ravikumar says any inquiry was not authorized

In light of these denials, I place more confidence in statements asserted to be in the MFIN report:

A second investigation commissioned by an industry umbrella group [MFIN, referenced below – Ed.] that probed the role of many microfinance companies did not draw conclusions but pointed to SKS involvement in two more cases that ended in suicide. Neither study has been made public.

A label, a fig leaf, or a watchdog?

Although not made public either, this report has not been disputed and has instead been tacitly confirmed.

[SKS Board chair] Ravikumar said the board reviewed reports from the Microfinance Institutions Network, but none of them implicated SKS employees.

The Japanese supposedly have a saying, The nail that sticks up is hammered down.SKS, as the largest market capitalization, has always been the principal target, and those quoted from SKS are understandably most interested in defending the narrow issue of their company’s culpability.

More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the government of the south Indian state.

If there is a cultural predilection for suicide, then it is a leap of causation to reach a count of 200, and even at that figure, it is fewer than 0.2% of all Indian suicides, especially when there are many suicides out of sheer poverty.But let us accept it.As Alok Prasad wrote me (personal communication):

Every suicide is a tragedy. Every suicide needs to be fully investigated. As per the National Crime Bureau data, there were 14,902 cases of suicides in Andhra Pradesh in 2010. This represented about 12% of the total number of suicides in India, even though the Andhra Pradesh population is just about 8% of the national total.

Over the past decade, this percentage has practically remained unchanged. The question – for which no answers are ever given – is, What has the Andhra Pradesh government done to deal with this societal issue?For that matter, if about 200 cases in 2010 were attributable to the activities of MFIs, what about the remaining 14,700?

Even 20 would be too many.

The state blamed microfinance companies — which give small loans intended to lift up the very poor — for fueling a frenzy of over-indebtedness and then pressuring borrowers so relentlessly that some took their own lives.

Because SKS’s tribulations represent a battle for the soul of microfinance, they’re worth reviewing in detail.

Both reports said SKS employees had:

1.Verbally harassed over-indebted borrowers

2.Forced them to pawn valuable items

3.Incited other borrowers to humiliate them

4.Orchestrated sit-ins outside their homes to publicly shame them.

Only in death would the debts be forgiven.

Whether 200 or only 1, the suicides are hideous, as are these AP stories of collection tactics:

Mumbai, India — First they were stripped of their utensils, furniture, mobile phones, televisions, ration cards and heirloom gold jewelry. Then, some of them drank pesticide. One woman threw herself in a pond. Another jumped into a well with her children.

Sometimes, the debt collectors watched nearby.

In America, we have the Fair Debt Collection Practices Act (FDCPA) powerful consumer-protection statutes that limit collectors’ ability to intimidate customers or extort payment.India does not.

Of course, we have tort lawyers in abundance …

One woman drank pesticide and died a day after an SKS loan agent told her to prostitute her daughters to pay off her debt. She had been given 150,000 rupees ($3,000) in loans but only made 600 rupees ($12) a week.

Even at $48 per month, obviously this woman had no ability to repay her loan unless her income suddenly tripled or quadrupled.Her originator had to have been paid on commission.This is a weakness in the compensation system.

Another SKS debt collector told a delinquent borrower [As far as I can tell, this is solely according to the unverified report – Ed.] to drown herself in a pond if she wanted her loan waived. The next day, she did. She left behind four children.

If true, it’s disgraceful.Worse than disgraceful, it’s criminal – or it should be.

One agent blocked a woman from bringing her young son, weak with diarrhea, to the hospital, demanding payment first. Other borrowers, who could not get any new loans until she paid, told her that if she wanted to die, they would bring her pesticide. An SKS staff member was there when she drank the poison. She survived.